English universities' teaching budgets were slashed today for the first time in a decade as part of savage government cuts to higher education.

The cuts come amid unprecedented demand for places, with an expected seven applications for every place at a top university.

Some £215m will be shaved off universities' teaching budgets in the academic year 2010-11, the Higher Education Funding Council for England (Hefce), which funds universities on behalf of the government, said in a letter to vice-chancellors.

The £4.7bn that institutions will receive for teaching is 1.6% less in real terms than the amount they received the year before. Vice-chancellors and student leaders said the cuts were "an extraordinary act of self-harm" that would destroy the quality of degree courses..

The amount universities are given for encouraging those from the poorest backgrounds to apply has also gone down by 0.75% to £144m.

Funds for research have been maintained in line with inflation at £1.6bn, but future grants will be concentrated on departments with higher quality ratings for their work – mainly the bigger, more prestigious universities.

Grants for capital projects, such as new buildings, have been cut by 14.9% in cash terms to £562m. This is the equivalent of a £142m cut.

An extra £10m will go to the teaching of science, technology, engineering and maths, which the government is keen to promote. Hefce said the funds were to support universities "that are shifting the balance of their provision towards these subjects".

In total, universities will receive £7.3bn allocatedfor teaching, research, building and other activities, £449m less than they expected to get. In March, each university will know how much they are to receive.

Lord Mandelson, the business secretary in charge of universities, announced before Christmas that university budgets would be slashed by £135m between 2010 and 2011. This is on top of "efficiency savings" of £180m for the same period. Over three years, total cuts will amount to £950m, a figure that has prompted university leaders to warn that the government is bringing higher education to its knees.

Professor Steve Smith, president of Universities UK, the umbrella group for vice-chancellors, said the cuts would damage course quality and increase competition for places.

University chiefs have warned that up to 300,000 young people could be turned away this year because the government has capped university places.

Smith said: "Last year, about 160,000 students who applied didn't end up going to university. This year, we already know there are about another 75,000 applying for university. There will be a lot of students who do not get a place at university."

Professor David Green, vice-chancellor of the University of Worcester, says up to 300,000 students could be rejected.

Last year, ministers were forced to announce emergency plans to fund 10,000 extra places for students wanting to study maths and science-based courses. But Mandelson said this was a "one off".

Sir Alan Langlands, Hefce's chief executive, said: "This is a challenging financial settlement, but we are doing all that we can to support excellence in teaching and research by keeping across-the-board reductions in core funding to universities and colleges to a minimum.

"These are testing times, but higher education has benefited from very substantial growth over the past 10 years and we should continue to aim for the very best within available resources."

Wes Streeting, the president of the National Union of Students, said: "In spite of protestations to the contrary, the cuts being imposed by the government are going to hit teaching, research and the number of places available – at a time of record demand. Singling out universities for cuts of this kind seems to me to be an extraordinary act of self-harm by the government.

"Investing in universities and students is absolutely vital to secure our economic recovery. We expect the government — and parties who aspire to govern — to rule out further cuts to the higher education and student support budgets."